Emerging market currencies have continued to lose value against the dollar amidst speculation that the Federal Reserve is going to start tapering sooner than later. While no one expects firm details to be announced in the official minutes released later today, if the Federal Reserve is optimistic about the ongoing economic recovery then tapering can’t be far off, Nicole Hong and Chiara Albanese of The Wall Street Journal report.
Federal Reserve’s policy of quantitative easing
The policy of quantitative easing (QE), which kept interest rates hovering above zero, has been a boon to developing economies as investors sent their money abroad looking for better returns. Low domestic interest rates also impacted international borrowing, making it easier for governments to finance their debt. The end of QE means that investors can bring money back to the West and enjoy stronger returns without the risks that emerging markets entail.
The Federal Reserve has already explained in broad terms that it will reduce QE gradually (so-called tapering), but has not yet announced when the process will begin.
Emerging market currencies taking a beating
Some hard hit currencies include the Indonesian rupiah, which has fallen to a four-year low against the dollar and is down more than 5 percent for the week; the Turkish lira, which has lost 10 percent of its value against the dollar and is now at a six-week low despite a rate hike by the central bank meant to combat further devaluation; the Brazilian real hit a four-year low against the dollar; and the South African rand and Mexican peso are both increasingly soft.
Benoit Anne, head of EM strategy at Societe Generale is particularly bearish on the Indian rupee, which has lost 15 percent of its value against the dollar since May and is now at a record low.
“We remain bearish on the INR on concerns of lower growth, Federal Reserve tapering fears and weakening sentiment given general elections next year,” Anne wrote in a recent briefing. “We expect the INR to weaken to 64.50 versus the USD at the end of Q3 2013 from 61.75 and weaken further to 66.25 at the end of Q4 2013.” Anne does note that the Indian rupee should rebound slightly next year, though it isn’t likely to regain the strength it had at the end of last year.